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IRS Extends Moratorium on Tax Shelter Enforcement

IRS
Commissioner Doug Shulman announced in a letter to Sen. Chuck
Grassley, R-Iowa, that the IRS is extending until March 1, 2010, a
moratorium on collection enforcement of the IRC § 6707A penalty for
failure to disclose tax shelters and other reportable transactions.

Shulman
first announced the moratorium July 6 in response to congressional
concerns that the penalty amounts—$100,000 for individuals and
$200,000 for other taxpayers—in many instances far exceed the tax
benefit of the targeted transactions. The moratorium, which applies
to cases in which the annual tax benefit from the transaction is
less than the otherwise applicable penalty, initially ran until
Sept. 30, 2009, which Shulman said would give Congress time to amend
the statute. Shulman later extended the moratorium to Dec. 31, 2009.

On
Nov. 16, 2009, Rep. John Lewis, D-Ga., introduced the Small Business
Penalty Relief Act of 2009, HR 4068. An identical bill, S. 2771, was
introduced in the Senate by Sen. Max Baucus, D-Mont.

The
bills would limit the penalty for listed transactions to the lesser
of the current statutory amounts or 75% of the tax benefit shown on
the return as a result of the transaction. Listed transactions would
carry a minimum penalty of $5,000 for individuals and $10,000 for
other taxpayers. The 75%-of-tax-benefit limit would also apply to
other reportable transactions, for which the maximum penalty would
be the current statutory penalty amounts under section 6707A(b)(1)
of $10,000 for individuals or $50,000 for other taxpayers (with no
minimum penalty amounts). The bills would apply to penalties
assessed after Dec. 31, 2006.

Both
bills were still in committee as Congress adjourned last week.

In a
letter last week to Shulman and Treasury Secretary Timothy Geithner,
Grassley protested what he said was the IRS’ continuing to place
liens on small businesses despite the moratorium, and he threatened
in a press release to block nominations of Treasury officials until
the issue was resolved.

Shulman
responded on Dec. 23, further extending the moratorium.He also said that earlier in December, the IRS
stopped filing new lien notices where the amount due was solely
related to a section 6707A penalty and would refrain from placing
such liens through the latest extension period. Grassley’s office
has told the The Washington Post that he will allow
the Treasury nominations to go forward.